You are on page 1of 38

CHAPTER 8

REDEMPTION OF
DEBENTURES
LEARNING OUTCOMES

After studying this chapter, you will be able to :


r Understand the requirement of Debenture Redemption
Reserve for the redemption of debentures.
r Deal with purchase of own debentures in the open market
and conversion of debentures.
r Solve problems based on redemption of debentures.

© The Institute of Chartered Accountants of India


8.2 ACCOUNTING

CHAPTER OVERVIEW

Secured Debentures
Security
Unsecured Debentures

Convertible Debentures
Convertibility
Non-convertible
Debentures

Redeemable Debentures
Types of
Permanence
Debentures Irredeemable
Debentures

Registered Debentures
Negotiability
Bearer Debentures

First Mortgage
Debentures
Priority
Second Mortgage
Debentures

Methods of redemption of debentures

By Payment in By payment in By purchase in By conversion into


Lumpsum instalments open market shares

© The Institute of Chartered Accountants of India


REDEMPTION OF DEBENTURES 8.3

1. INTRODUCTION
A debenture is an instrument issued by a company under its seal, acknowledging a
debt and containing provisions as regards repayment of the principal and interest.
Under Section 71 (1) of the Companies Act, 2013, a company may issue debentures
with an option to convert such debentures into shares, either wholly or partly at the
time of redemption. Provided that the issue of debentures with an option to convert
such debentures into shares, wholly or partly, should be approved by a special
resolution passed at a duly convened general meeting. Section 71 (2) further provides
that no company can issue any debentures which carry any voting rights. Section 71 (4)
provides that where debentures are issued by a company, the company should create a
debenture redemption reserve account out of the profits of the company available for
payment of dividend and the amount credited to such account should not be utilised
by the company for any purpose other than the redemption of debentures.
Basic provisions
If a charge has been created on any or the entire asset of the company,
¾ the nature of the charge
¾ the assets charged
are described therein.
• Since the charge is not valid unless registered with the Registrar, his certificate
registering the charge is printed on the bond.
• It is also customary to create a trusteeship in favor of one or more persons in the
case of mortgage debentures. The trustees of debenture holders have all powers
of a mortgage of a property and can act in whatever way they think necessary to
safeguard the interest of debenture holders.
Note: Issue of debentures has already been discussed in detail at Foundation level.
Students are advised to refer the Foundation study material for understanding of the
requirements relating to issue of debentures.

2. REDEMPTION OF DEBENTURES
Debentures are usually redeemable, but a company may also issue irredeemable
debentures.
Redeemable debentures may be redeemed
¾ after a fixed number of years or
¾ any time after a certain number of years has elapsed since their issue,
¾ on giving a specified notice, or by annual drawing.
© The Institute of Chartered Accountants of India
8.4 ACCOUNTING

A company may also purchase its debentures, as and when convenient in the open
market and when debentures are quoted at a discount on the Stock Exchange, it may
be profitable for the company to purchase and cancel them

3. DEBENTURE REDEMPTION RESERVE


A company issuing debentures is required to create a debenture redemption reserve
account out of the profits available for distribution of dividend and amounts credited to
such account cannot be utilised by the company except for redemption of debentures.
Such an arrangement would ensure that the company will have sufficient liquid funds
for the redemption of debentures at the time they should fall due for payment.
An appropriate amount is transferred from profits every year to Debenture Redemption
Reserve and its investment is termed as Debenture Redemption Reserve Investment.
These investment earn certain amount of income i.e. interest which is reinvested
together with the fixed appropriated amount for the purpose in subsequent years. In
last year, the interest earned and the appropriated fixed amount are not invested. In
fact, at this stage the Debenture Redemption Reserve Investments are encashed and
the amount so obtained is used for the redemption of debentures. Any profit or loss
made on the encashment of Debenture Redemption investments is also transferred to
Debenture Redemption Reserve Account.
3.1 Liability of the Company to Create Debenture Redemption Reserve
Section 71 of the Companies Act 2013 covers the requirement of creating a debenture
redemption reserve account. Section 71 states as follows:
(1) Where a company issues debentures under this section, it should create a
debenture redemption reserve account out of its profits which are available for
distribution of dividend every year until such debentures are redeemed.
(2) The amounts credited to the debenture redemption reserve should not be
utitlised by the company except for the purpose aforesaid.
(3) The company should pay interest and redeem the debentures in accordance
with the terms and conditions of their issue.
(4) Where a company fails to redeem the debentures on the date of maturity or
fails to pay the interest on debentures when they fall due, the Tribunal may, on
the application of any or all the holders of debentures or debenture trustee and,
after hearing the parties concerned, direct, by order, the company to redeem
the debentures forthwith by the payment of principal and interest due thereon.

© The Institute of Chartered Accountants of India


REDEMPTION OF DEBENTURES 8.5

3.2 Journal Entries


The necessary journal entries passed in the books of a company are given below:
1. At the end of First Year
(a) For setting aside the fixed amount of profit for redemption
Profit and Loss A/c Dr.
To Debenture Redemption Reserve A/c
(b) For investing the amount set aside for redemption
Debenture Redemption Reserve Investment A/c Dr.
To Bank A/c
2. At the end of second year and subsequent years other than last year
(a) For receipt of interest on Debenture Redemption Reserve Investments
Bank A/c Dr.
To Interest on Debenture Redemption Reserve Investment A/c
(b) For transfer of Interest on Debenture Redemption Reserve Investment
(DRRI) to Debenture Redemption Reserve Account
Interest on Debenture Redemption Reserve Investment A/c Dr.
To Debenture Redemption Reserve A/c
(c) For setting aside the fixed amount of profit for redemption
Profit and Loss A/c Dr.
To Debenture Redemption Reserve A/c
(d) For investments of the amount set aside for redemption and the interest
earned on DRRI
Debenture Redemption Reserve Investment A/c Dr.
To Bank A/c
3. At the end of last year
(a) For receipt of interest
Bank A/c Dr.
To Interest on Debenture Redemption Reserve Investment A/c
(b) For transfer of interest on Debenture Redemption Reserve Investment to
Debenture Redemption Reserve Investment A/c
Interest on Debenture Redemption Reserve Investment A/c Dr.
To Debenture Redemption Reserve A/c
(c) For setting aside the fixed amount of profit for redemption
Profit and Loss A/c Dr.

© The Institute of Chartered Accountants of India


8.6 ACCOUNTING

To Debenture Redemption Reserve A/c


(d) For encashment of Debenture Redemption Reserve Investments
Bank A/c Dr.
To Debenture Redemption Reserve Investment A/c
(e) For the transfer of profit/loss on realisation of Debenture Redemption
Reserve Investments
(i) In case of Profit
Debenture Redemption Reserve Investment A/c Dr.
To Debenture Redemption Reserve A/c
Or
(ii) In case of Loss
Debenture Redemption Reserve A/c Dr.
To Debenture Redemption Reserve Investment A/c
(f) For amount due to debentureholders on redemption
Debenture A/c Dr.
To Debentureholder A/c
(g) For payment to debentureholders
Debentureholders A/c Dr.
To Bank A/c
3.3 Balance in Debenture Redemption Reserve (DRR)
The balance to the credit of Debenture Redemption Reserve, may in certain
circumstances may either be more or less as compared to the amount of debentures
which are proposed to be redeemed.
¾ If it is in excess, the amount is transferred to the Capital Reserve, on the
assumption that it is a capital profit received on the appreciation in the value of
investments or settlement of liability for a lesser amount that what was usually
payable.
¾ On the other hand, if it is short, the deficit is made up by the transfer from
Profit and Loss Account. The balance in the account, equal to the amount of
debentures redeemed is subsequently transferred to General Reserve.
Debentures sometimes are redeemable at a premium. In such a case, the appropriation
to the Redemption Reserve should be sufficient to pay both the amount of debentures
and the premium on redemption. When the company decides to establish the Debenture
Redemption Reserve Account at the end of the first year, the amount indicated by
the Debenture Redemption Reserves tables is credited to the Debenture Redemption
Reserve account and debited to profit and loss account. That shows the intention of

© The Institute of Chartered Accountants of India


REDEMPTION OF DEBENTURES 8.7

the company to set aside regular sums of money to build up a fund for redeeming
debentures. Immediately, the company should also purchase outside investments.
The entry for the purpose naturally will be to debit Debenture Redemption Reserve
investments and credit bank
In the subsequent years, when interest is received on investments, the bank account
will be debited and interest on Debenture Redemption Reserve investments account
will be credited. The balance in the latter account will be transferred to the Debenture
Redemption Reserve account; the annual instalment will be debited to the profit
and loss account and credited to the Debenture Redemption Reserve account. The
investments every year will be of an amount equal to the annual instalment plus the
interest which may have been received in the year concerned. Thus, the Debenture
Redemption Reserve will go on accumulating each year. [Note: Infact, a notional entry
of transfer of interest (and also profit or loss on realisation of Debenture Redemption
Reserve investments) to the profit and loss account and then again to Debenture
Redemption Reserve will meet strict requirement of law and AS 13 as well.]
Note: It may be stated that the Debenture Redemption Reserve is sometimes non-
cumulative. In that case, interest received on Debenture Redemption Reserve
investments will not be credited to Debenture Redemption Reserve nor it will be
invested; the amount of the interest will be credited to the profit and loss account.
In the last year, the Debenture Redemption Reserve investments will be realised; the
amount will be debited to the bank account and credited to the Debenture Redemption
Reserve investments account. If there is any loss or profit, it will be transferred to
the Debenture Redemption Reserve account, with the corresponding entry in the
Debenture Redemption Reserve investment account. Thus, the amount available by
sale of investments will be utilised to pay off the debentures; debentures account will be
debited and the bank account credited. The Debenture Redemption Reserve account
will still show a big credit balance almost equal to the amount of the debentures. This
will be transferred to the general reserve.
Note: Investments may be realised from time to time and debentures may be purchased
either for immediate cancellation or as investment as the company pleases. In that
case, also the profit or loss on the sale of investments should be transferred to the
Debenture Redemption Reserve investment; the interest saved on such debentures
should be debited to the debenture interest account and credited to the interest on
Debenture Redemption Reserve account directly.
From the accounting point of view, the purchase of debentures involves two problems
first, adjustment of the premium or discount, if any paid on their purchase and second,
adjustment of interest payable on them. Where a Debenture Redemption Reserve is

© The Institute of Chartered Accountants of India


8.8 ACCOUNTING

kept the amount of premium or discount is adjusted therein on cancellation so that at


the date of redemption, the balance of the Debenture Investments Account, is equal
to the Debenture Account. But, if there is none, debenture investments are treated like
other investments.
As regards interest, where there is a Debenture Redemption Reserve, the interest on
debentures held as an investment made out of the fund is credited to the Debenture
Redemption Reserve in exactly the same way as the debentures are outside investments.
But where there is no Debenture Redemption Reserve, since the adjustment of interest
on debentures held as investments would merely involve crediting and debiting the
Profit and Loss Account by the same amount, often it is not made. However, on their
purchase or cancellation an amount equal to the nominal value of debentures is
transferred to General Reserve from the Profit & Loss Account on the consideration
that to such an extent the profits will not be available for distribution.
If the debentures are purchased within the interest period, the price would be inclusive
of interest provided these are purchased “cum interest”; but if purchased “ex Interest”,
the interest to the date of purchase would be payable to the seller in addition. In order
to adjust the effect thereof the amount of interest accrued till the date of purchase, if
paid, is debited to the Interest Account against which the interest for the whole period
will be credited. Thus, in result, a balance in the Account would be left, equal to the
interest for the period the debentures were held by the company.
3.4 Investment of Debenture Redemption Reserve (DRR) Amount
Every company required to create DRR should before the 30th day of April of each year,
deposit or invest, as the case may be, a sum which should not be less than 15% of the
amount of its debentures maturing during the year ending on the 31st day of March
next following in any one or more of the following methods, namely:
(a) in deposits with any scheduled bank, free from charge or lien;
(b) in unencumbered securities of the Central Government or of any State
Government;
(c) in unencumbered securities mentioned in clauses (a) to (d) and (ee) of
Section 20 of the Indian Trusts Act, 1882;
(d) in unencumbered bonds issued by any other company which is notified
under clause (f) of Section 20 of the Indian Trusts Act, 1882;
The amount deposited or invested, as the case may be, above should not be utilised
for any purpose other than for the repayment of debentures maturing during the year
referred to above, provided that the amount remaining deposited or invested, as the
case may be, should not at any time fall below 15% of the amount of debentures
maturing during the 31st day of March of that year.

© The Institute of Chartered Accountants of India


REDEMPTION OF DEBENTURES 8.9

3.5 Adequacy of Debenture Redemption Reserve (DRR)


Ministry of Corporate Affairs has made the following clarification on adequacy of
Debenture Redemption Reserve (DRR) vide Circular no. 04/2013 dated 11 February,
2013:-

Adequacy of Debenture Redemption


Reserve (DRR)
(i) For debentures issued by All No DRR is required
India Financial Institutions (AIFIs)
regulated by Reserve Bank of India
and Banking Companies for both
public as well as privately placed
debentures
(ii) For other Financial Institutions (FIs) DRR will be as applicable to NBFCs
registered with RBI (as per (iii) below)
(iii) For debentures issued by NBFCs 25% of the value of outstanding
registered with RBI and for housing debentures issued through public
finance companies registered with issue. No DRR is required in the case of
National Housing Bank privately placed debentures.
(iv) For debentures issued by other 25% of the value of outstanding
companies including manufacturing debentures issued through public issue.
and infrastructure companies Also 25% DRR is required in the case of
privately placed debentures by listed
companies.
For unlisted companies issuing
debentures on private placement basis,
the DRR will be 25% of the value of
outstanding debentures.

4. METHODS OF REDEMPTION OF DEBENTURES

Redemption of debentures must be done according to the terms of issue of debentures


and any deviation there from will be treated as a default by the company.
Redemption by paying off the debt on account of debentures issued can be done in
one of the three methods viz :
4.1 By payment in lumpsum
Under payment in lumpsum method, at maturity or at the expiry of a specified period
of debenture the payment of entire debenture is made in one lot or even before the
expiry of the specified period.
© The Institute of Chartered Accountants of India
8.10 ACCOUNTING

4.2 By payment in Instalments


Under payment in installments method, the payment of specified portion of debenture
is made in installments at specified intervals.
4.3 Purchase of Debentures in Open Market
Debentures sometimes are purchased in open market; where there is a Debenture
Redemption Reserve out of the reserve and, if there is none, as a general investment;
the Debenture Investment Account or Own Debenture Account is debited.
Suppose a company has issued 8% debentures for ` 10,00,000, interest being payable
on 31st March and 30th September. The company purchases ` 50,000 debentures at
` 96 on 1st August 20X1. This means that the company will have to pay ` 48,000 as
principal plus ` 1,333 as interest for 4 months.
Entry ` `
Own Debentures (50,000 x 96/ 100) Dr. 48,000
Interest Account (50,000 x 8% x 4/12) Dr. 1,333
To Bank 49,333
It should be noted that even though ` 50,000 debentures have been purchased for
` 48,000 there is no profit. On purchase of anything, profit does not arise; only on
sale, and in this case on cancellation of debentures, profit could arise.
On 30th September, the company will have to pay ` 38,000 as interest to outsiders,
i.e. 8% on ` 9,50,000 for six months. But since the company is keeping the debentures
alive, it means, it has saved interest for two months. Therefore, ` 667 should be
debited to Debentures Interest Account and credited to the Profit and Loss Account.
If this entry is passed, it will be noted that the debenture interest account will be
debited by the full amount of ` 40,000 which is interest for six months on ` 10 lakhs.
This should be so since in the balance sheet it will be a liability of ` 10,00,000. ` 50,000
own debentures will be shown on the assets side of the Balance Sheet. However, in
the amount column only ` 48,000 will be entered.
Suppose out of those debentures ` 30,000 is sold at ` 98 cum interest on 1st March,
20X2 and the remaining ` 20,000 is cancelled on 31st March, 20X2. The journal entries
to be passed will be the following:

© The Institute of Chartered Accountants of India


REDEMPTION OF DEBENTURES 8.11

` `
1st March, 20X2 Dr. 29,400
(1) Bank (30,000 x 98/ 100) 28,400
To Own Debentures A/c 1,000
To Interest A/c (30,000 x 8% x 5/12)
(Sale of ` 30,000 Debenture @ ` 98 cum interest for 5 months credited
to Interest A/c, the balance being the own debentures A/c)
(2) Profit and Loss A/c Dr. 400
To Own Debentures A/c
400
(The loss on ` 30,000 Own Debentures whose purchase price
was ` 28,800 @ 96)

31st March, 20X2


8% Debentures A/c Dr. 20,000

To Own Debentures A/c 19,200


To Capital Reserve A/c 800

(Cancellation of ` 20,000 Debentures)

It should be noted that the profit on cancellation or redemption of debentures should


be treated as a capital profit and, therefore, credited to the capital reserve.
ILLUSTRATION 1
On January 1, Rama Ltd., had 500 Debentures of ` 100 each outstanding in its books
carrying interest at 6% per annum. In accordance with the powers in the deed, the
directors acquired debentures from the open market for immediate cancellation as
follows:
March 1 ` 5,000 at ` 98.00 (cum interest)
Aug. 1 ` 10,000 at ` 100.25 (cum interest)
Dec. 15 ` 2,500 at ` 98.50 (ex-interest)
Debenture interest is payable half-yearly, on 30th June and 31st Dec.
Show ledger accounts of Debentures, Debenture interest and profit or loss on cancellation,
ignoring income-tax.

© The Institute of Chartered Accountants of India


8.12 ACCOUNTING

Solution
6% Debentures Account
1st Half Year
` ` `
Mar. 1 To Bank-Debentures Jan. By Balance 50,000
1 b/d
Purchased [(5,000 x 4,850
98/ 100) – 50]
To Profit & Loss on
cancellation of
debenture A/c 150 5,000
(5,000 – 4,850)
June 30 To Balance c/d 45,000
50,000 50,000
Profit & Loss on Cancellation of Debentures

June 30 To Capital Reserve ` 150 Mar. 1 By Debenture ` 150


(transfer) Account
Debenture Interest Account

` `
Mar. 1 To Bank-Interest for 2 months June 30 By Profit & 1,400
Loss A/c
on ` 5,000 Debentures @ 6% 50
June 30 To Debenture-holders (Interest)
A/c (45,000 x 6% x 6/12) 1,350
1,400 1,400

Debenture-holders (Interest) Account

` `
June 30 To Cash 1,350 June 30 By Debenture interest 1,350
Account (Interest on
` 45,000 @ 6% upto 30th
June)

© The Institute of Chartered Accountants of India


REDEMPTION OF DEBENTURES 8.13

2nd Half Year


6% Debentures Account

` ` `
Aug. 1 To Bank-Debenture July 1 By Balance b/d 45,000
Purchased [(10,000 x 9,975
100.25/ 100) – 50]
To P & L A/c on
Cancellation 25
(10,000 – 9,975)
Dec. 15 To Bank-Deb. 2,462.50
(2,500 x 98.50/ 100)
Purchased
To Profit & Loss
on Cancellation
of Debentures 37.50 2,500
(2,500 – 2,462.50)
Dec. 31 To Balance c/d 32,500

45,000 45,000

Profit & Loss on Cancellation of Debentures Account

` `
Dec. 31 To Capital Reserve — Aug. 1 By Debenture A/c 25.00
Transfer 62.50 Dec. 15 By Debenture A/c 37.50
62.50 62.50

Debenture Interest Account

` `
Aug. 1 To Bank - Interest for 50.00 Dec. By P & L Account 1,093.75
one month on `
10,000 @ 6%
Dec. 15 To Bank (2,500 x 6% x 68.75
5.5/ 12)
Dec. 31 To Debenture holders 975.00
(32,500 x 6% x 6/12)
1,093.75 1,093.75
© The Institute of Chartered Accountants of India
8.14 ACCOUNTING

Debenture-holders (Interest) Account

` `
Dec. 31 To Bank 975.00 Dec. 31 By Debenture Interest
(on ` 32,500 @ 6% for 6 975.00
months)

Tutorial Notes :
(i) Profit or loss on redemption of debenture arises only on sale or cancellation; if
debentures are purchased but not cancelled the total amount paid (minus the
interest to the date of purchase, if the transaction is cum-interest) should be
debited to Own Debentures Account and shown as investment in the Balance
Sheet. On cancellation, the account will be credited and Debenture Account
debited: the difference between the nominal value of the debentures cancelled
and the amount standing to the debit on Own Debentures Account will be
profit or loss on redemption of debentures.
(ii) If debentures are straightway cancelled on purchase, the profit or loss on
redemption of debentures will be ascertained by comparing (i) the nominal
value of debentures cancelled, and (ii) the price paid less interest to the date of
purchase (if the transaction is cum-interest).
(iii) In case the transaction is ex-interest, the interest to the date of transaction will
be paid in addition to the settled price and hence profit on redemption will be
nominal value minus the settled price.
ILLUSTRATION 2
The following balances appeared in the books of a company as on December 31,20X1:
6% Mortgage 10,000 debentures of ` 100 each; Debenture Redemption Reserve (for
redemption of debentures) ` 10, 42,000; Investment ` 5,28,000, 4% Government Loan
purchased at par and ` 5,60,000, 3-1/2% Government paper purchased for ` 5,42,000.
The Interest on debentures had been paid up to December 31,20X1.
On February 28, 20X2, the investments were sold at ` 90 and ` 87 respectively and the
debentures were paid off at 101, together with accrued interest.
Write up the ledger accounts concerned. The Debenture Redemption Reserve is non
cumulative.

© The Institute of Chartered Accountants of India


REDEMPTION OF DEBENTURES 8.15

Solution
6% Mortgage Debentures Account

20X2 ` 20X2 `
Feb. 28 To Debenture- 10,00,000 Jan. 1 By Balance b/d 10,00,000
holders A/c

Premium on Redemption of Debentures Account

20X2 ` 20X2 `
Feb. 28 To Debenture- 10,000 Feb. 28 By D.R.R. A/c 10,000
holders A/c

Debentures Redemption Reserve Investment Account

20X2 ` 20X2 `
Jan. 1 To Balance b/d 10,70,000 Feb. 28 By Bank ` 5,28,000
(5,28,000 + Govt. Loan @ ` 90 4,75,200
5,42,000)
By Bank ` 5,60,000
Govt. Paper @ ` 87 4,87,200
By D.R.R. (Loss) 1,07,600
10,70,000 10,70,000

Debenture Interest Account

20X2 ` 20X2 `
Feb. 28 To Cash (10,000 x 10,000 Feb. 28 By Profit & Loss 10,000
100 x 6% x 2/12) A/c

Cash Account

20X2 ` 20X2 `
Feb. To Balance b/d ? Feb. 28 By Debenture- 10,10,000
holders
(10,000 x 101)
To Debentures By Deb. Interest 10,000
Redemption A/c
Reserve investment 9,62,400 By Balance c/d ?
A/c (4,75,200 +
4,87,200)

© The Institute of Chartered Accountants of India


8.16 ACCOUNTING

Debenture Redemption Reserve Account

20X2 ` 20X2 `
Feb. To D.R.R. Investment Jan. 1 By Balance b/d 10,42,000
Account (Loss) 1,07,600 By Profit & Loss (b.f.)
To Premium on 75,600
Redemption of
Debentures A/c 10,000
To General Reserve 10,00,000
11,17,600 11,17,600

ILLUSTRATION 3
Sencom Limited issued ` 1,50,000 5% Debentures on which interest is payable half
yearly on 31st March and 30th September. The company has power to purchase
debentures in the open market for cancellation thereof. The following purchases were
made during the year ended 31st December, 20X1 and the cancellation were made on
the following 31st March :
1st March ` 25,000 nominal value purchased for ` 24,725 ex-interest.
1st September ` 20,000 nominal value purchased for ` 20,125 cum-interest.
You are required to draw up the following accounts up to the date of cancellation :
(i) Debentures Account;
(ii) Own Debenture Investment Account; and
(iii) Debenture Interest Account.
Ignore taxation and make calculations to the nearest rupee.
Solution
Sencom Limited
Debenture Account

20X1 ` 20X1 `
Dec. 31 To Balance c/d 1,50,000 Jan. 1 By Balance b/d 1,50,000
20X2 20X2
Mar. 31 To Own Debenture A/c 45,000 Jan. 1 By Balance b/d 1,50,000
To Balance c/d 1,05,000
1,50,000 1,50,000
April. 1 By Balance b/d 1,05,000

© The Institute of Chartered Accountants of India


REDEMPTION OF DEBENTURES 8.17

Own Debenture Investment Account

Nominal Interest Cost Nominal Interest Cost


Cost Cost
20X1 ` ` ` 20X1 ` ` `
Mar. 1 To Bank 25,000 521 1
24,725 Mar. 31 By Debenture
Sep. 1 To Bank 20,000 417 2
19,7083 Interest A/c — 625 —
Dec. 31 To P & L A/c 1,375 Sep. 30 By Deben¬ture
(b.f.)
Interest A/c — 1,125 —
Dec. 31 By Debenture
Interest A/c — 563 —
By Balance c/d 45,000 — 44,433
45,000 2,313 44,433 45,000 2,313 44,433
20X2 20X2
Jan. 1 To Balance 45,000 44,433 Mar. 31 By Debenture
b/d
Mar. 31 To Capital Interest A/c — 563 —
Reserve
(Profit on — — 567 By 5% Deb. 45,000 — 45,000
cancellation) A/c
(b.f.)
To P & L A/c — 563 —
45,000 563 45,000 45,000 563 45,000
1
25,000 × 5% × 5/12
2
20,000 × 5% × 5/12
3
20125 – 417

Debenture Interest Account

20X1 ` 20X1 `
Mar. 31 To Bank (on ` 1,25,000 @ 3,125 Jan. 1 By Accrued Interest 1,875
5% for 6 months) (on ` 1,50,000 @
5% for 3 months)
To Interest on own 625 Dec. 31 By P & L A/c 7,500
Debentures
(25,000 x 5% x 6/ 12)
Sep. 30 To Bank (on ` 1,05,000
@ 5% for 6 months) 2,625
To Interest on own
Debentures 1,125
(45,000 x 5% x 6/12)
© The Institute of Chartered Accountants of India
8.18 ACCOUNTING

Dec. 31 To Interest accrued


(on ` 1,05,000 for
1,312
3months @ 5%)
To Interest on own
debentures (on ` 45,000 563
for 3 months @ 5%)
9,375 9,375
20X2 20X2
Mar. 31 To Bank (on ` 1,05,000 for 2,625 Jan. 1 By Interest Accrued 1,312
6 months @ 5%)
To Interest on own Mar. 31 By P & L A/c 1,876
debentures
(on ` 45,000 for 3 563
months)
3,188 3,188
ILLUSTRATION 4
MM Ltd. had the following among their ledger opening balances on January 1,20X1:
`
11% Debentures A/c (2000 issue) 50,00,000
Debenture Redemption Reserve A/c 45,00,000
13.5% Debentures in XX Ltd. A/c (Face Value ` 20,00,000) 19,50,000
Own Debentures A/c (Face value ` 20,00,000) 18,50,000
As 31st December, 20X1 was the date for redemption of the 2000 debentures, the
company started buying own debentures and made the following purchases in the
open market :
1-2-20X1 2,000 debentures at ` 98 cum-interest.
1-6-20X1 2,000 debentures at ` 99 ex-interest.
Half yearly interest is due on the debentures on the 30th June and 31st December in the
case of both the companies.
On 31st December, 20X1, the debentures in XX Ltd. were sold for ` 95 each ex-interest.
On that date, the outstanding debentures of MM Ltd. were redeemed by payment and
by cancellation.
Show the entries in the following ledger accounts of MM Ltd. during 20X1:
(a) Debenture Redemption Reserve A/c
(b) Own Debentures A/c
The face value of a debenture was ` 100 (Round off calculations to the nearest rupee.)

© The Institute of Chartered Accountants of India


REDEMPTION OF DEBENTURES 8.19

Solution
(a) Debenture Redemption Reserve Account

20X1 ` 20X1 `
Dec. 31 To 13.5% Deb. in Jan. 1 By Balance b/d 45,00,000
XX Ltd.
(Loss on sale of 50,000 Dec. 31 By 13.5% Deb. in XX
investment) Ltd. 2,70,000
By Own Deb. A/c
(Int. on own Deb.) 2,53,000
To General Reserve 49,73,000
(transfer) (b.f.)
50,23,000 50,23,000
11% Debentures Account

20X1 ` 20X1 `
Dec. 31 To Own Debentures A/c 24,00,000 Jan. 1 By Balance b/d 50,00,000
To Bank 26,00,000
50,00,000 50,00,000

(b) Own Debentures Account

Nominal Int. Amt. Nominal Int. Amt.


20X1 ` ` ` 20X1 ` ` `
Jan. 1 To Balance b/d 20,00,000 - 18,50,000 June 30 By Debenture
Feb. 1 To Bank 2,00,000 1,8331 1,94,1672 Int. A/c 1,32,0003
June 1 To Bank 2,00,000 9,167 1,98,000 Dec. 31 By Debenture
4 5

Dec. 31 To Capital Res. Int. A/c 1,32,0006


(profit on By 11% Deb 24,00,000
cancellation) 1,57,833 Account 24,00,000
(b.f.) (cancellation)
To Deb. 2,53,000
Redemption
Reserve (b.f.)
24,00,000 2,64,000 24,00,000 24,00,000 2,64,000 24,00,000
1
2,00,000 x 11% x 1/12 4
2,00,000 x 11% x 5/12
2
(2,000 x 98) – 1,833 5
2,000 x 99
3
24,00,000 x 11% x 6/12 6
24,00,000 x 11% x 6/12

© The Institute of Chartered Accountants of India


8.20 ACCOUNTING

Working Note :
13.5% Debentures in XX Ltd.

Interest Amount Interest Amount


20×1 ` ` 20×1 ` `
Jan. 1 To Balance b/d 19,50,000 June 30 By Bank (20,00,000 × 1,35,000
(20,00,000) 13.5% × 6/12)
Dec. 31 By Bank (20,00,000 × 1,35,000
13.5% × 6/12)
Dec. 31 To Debenture By Bank (20,00,000 × 19,00,000
95/ 100)
Redemption. 2,70,000 By Debenture
Reserve (1,35,000 + Redemption
1,35,000)
Reserve
(Loss on sale) 50,000
(19,50,000 – 19,00,000)
2,70,000 19,50,000 2,70,000 19,50,000
ILLUSTRATION 5
(i) Swati Associates Ltd. has issued 10,000 12% Debentures of ` 100 each on
1-1-20X1. These debentures are redeemable after 3 years at a premium of
` 5 per debenture. Interest is payable annually.
(ii) On October 1, 20X2, it buys 1,500 debentures from the market at ` 98 per
debenture. These are sold away on June 30, 20X3 at ` 105 per debenture.
(iii) On January 1, 20X3 it buys 1,000 debentures at ` 104 per debenture from the
open market. These are cancelled on April 1, 20X3.
(iv) On October 1, 20X3 it buys 2,000 debentures at ` 106 per debenture from the
open market. These debentures along with other debentures are redeemed on
31st December, 20X3.
Prepare the relevant Ledger Accounts showing the above transactions. Workings
should form part of your answer. Also show the extracts of statement of profit & loss
own Debenture Account for the year 20X1,20X2,20X3.

© The Institute of Chartered Accountants of India


REDEMPTION OF DEBENTURES 8.21

Solution
Own Debentures Account
20×2 Interest Amount 20 × 2 Interest Amount
` ` ` `
Oct. 1 To Bank (` 1,50,000) 13,500 1,47,000 Dec. 31 By Debenture Int. A/c 18,000 1,47,000
(refer W.N. (i)) (refer W.N. (ii))
To Profit & Loss A/c 4,500 By Balance c/d
(b.f.)
18,000 1,47,000 18,000 1,47,000

20X3 20X3
Jan. 1 To Balance b/d 1,47,000 April 1 By Debenture Int. A/c 3,000
(W.N. (ii))
Jan. 1 To Bank 1,04,000 By 12% Deb. A/c 1,00,000

Apl. 1 To Profit & Loss A/c 3,000 By Profit & Loss 4,000
A/c (1,04,000 –
1,00,000)
June 30 To Profit & Loss A/c 9,000 10,500* June 30 By Bank 9,000 1,57,500**

Oct. 1 To Bank (` 2,00,000) 18,000 2,12,000 Dec. 31 By Deb. Int. A/c (W.N.
24,000
(W.N. (i)) (ii))
Dec. 31 To Profit & Loss A/c 6,000 By 12% Deb. A/c 2,00,000
(cancelled)
By Profit & Loss 12,000
A/c (2,12,000 –
2,00,000)
36,000 4,73,500 36,000 4,73,500

*1,57,500 – 1,47,000
**1,500 x 105

Note :
It has been assumed that all transactions are ex-interest. The amount of such interest
has been calculated from the previous 1st January to the date of transaction since the
interest is payable annually.

© The Institute of Chartered Accountants of India


8.22 ACCOUNTING

Debenture Interest Account


20X1 ` 20 X 1 `
Dec. 31 To Bank A/c (10,000 x 100 x 12%) 1,20,000 Dec. 31 By Profit & Loss A/c 1,20,000

20X2 To Bank A/c 1,02,000 20X2


Dec. 31 To Int. on Own Deb. A/c 18,000 Dec. 31 By Profit & Loss A/c 1,20,000
1,20,000
1,20,000
20X3 3,000 20X3
Apl.1 To Int. on Own Deb. A/c 24,000 Dec. 31 By Profit & Loss A/c (b.f.) 1,11,000
Dec. 31 To Int. on Own Deb. A/c
To Bank A/c 84,000
(12% on ` 7,00,000 )*

1,11,000 1,11,000

*(10,000 – 1,000 – 2,000) x 100


Statement of Profit & Loss (Extracts) for the year 20X1
Particulars Notes Amount
Expenses
Finance costs XX 1,20,000
Total expenses .....
Notes to accounts
xx. Finance costs
Interest on debenture 1,20,000

Statement of Profit & Loss (Extracts) for the year 20X2


Particulars Notes Amount
Other Income XX 4,500
Total Revenue .....
Expenses
Finance costs XXX 1,20,000
Total expenses .....
Notes to accounts
xx. Other Income
Int. on Own Deb. A/c (18,000 - 13,500) 4,500
xxx. Finance costs
Interest on debenture 1,20,000

© The Institute of Chartered Accountants of India


REDEMPTION OF DEBENTURES 8.23

Statement of Profit & Loss (Extracts) for the year 20X3


Particulars Notes Amount
Other Income XX 28,500
Total Revenue
Expenses
Finance costs XXX 51,000
Total expenses
Notes to accounts
xx. Other Income
Int. on Own Deb. A/c (36,000 - 18,000) 18,000
Profit on cancellation of debentures 10,500
Total 28,500
xxx. Finance costs
Loss on cancellation of debentures (4,000 + 12,000) 16,000
Premium on redemption of debentures (` 7,00,000 @ 5%) 35,000
Total 51,000

Premium on Redemption of Debentures A/c


20X1 ` 20 X 1 `
Dec. 31 To Bank 35,000 Dec. 31 By Profit & Loss A/c 35,000

12% Debentures Account


20X1 ` 20 X 1 `
Dec. 31 To Balance c/d 10,00,000 Jan. 1 By Bank 10,00,000
20X2 20X2
Dec. 31 To Balance c/d 10,00,000 Jan. 1 By Balance b/d 10,00,000
20X3 20X3
Apl. 1 To Own Deb. A/c 1,00,000 Jan. 1 By Balance b/d 10,00,000
Dec. 31 To Own Deb. A/c 2,00,000
To Bank 7,00,000
10,00,000 10,00,000

Working Notes
(i) Interest paid on purchase of own debentures:
Date Nominal Amount Period Rate Interest
20X2 Oct. 1 ` 1,50,000 9 months 12% 13,500
20X3 Oct. 1 ` 2,00,000 9 months 12% 18,000
(ii) Interest credited to Interest on Own Debenture A/c
Date Nominal Amount Period Rate Interest
20X2 Dec. 31 ` 1,50,000 12 months 12% 18,000
20X3 April 1 ` 1,00,000 3 months 12% 3,000
20X3 June 30 ` 1,50,000 6 months 12% 9,000
20X3 Dec. 31 ` 2,00,000 12 months 12% 24,000
(iii) Profit/Loss on cancellation/sales is difference between cost or nominal value
and sales price.
© The Institute of Chartered Accountants of India
8.24 ACCOUNTING

ILLUSTRATION 6
The following balances appeared in the books of Paradise Ltd on 1-4-20X1:
(i) 12 % Debentures ` 7,50,000
(ii) Balance of DRR ` 6,00,000
(iii) DRR Investment 6,00,000 represented by 10% ` 6,50,000 secured bonds of
government of India.
Annual contribution to the DRR was ` 1,20,000 made on 31st March each year. On
31-3-20X2, balance at bank was ` 3,00,000 before receipt of interest. The company sold
the investment at 90% of cost, for redemption of debentures at a premium of 10% on the
above date.
You are required to prepare the following accounts for the year ended 31st march, 20X2:
(1) Debentures Account
(2) DRR Account
(3) DRR Investment Account
(4) Bank Account
(5) Debenture Holders Account.
Solution
1. 12% Debentures Account
Date Particulars ` Date Particulars `
31st To Debenture holders A/c 7,50,000 1st April, By Balance b/d 7,50,000
March, 20X1
20X2
7,50,000 7,50,000

2. DRR Account
Date Particulars ` Date Particulars `
31st To 10% Secured Bond A/c 15,000 1st April, By Balance b/d 6,00,000
March, (loss) 20X1
20X2 (6,00,000 – 5,85,000)

31st To General reserve A/c 7,70,000 31st By Profit and loss 1,20,000
March, (Bal.fig.) March, A/c
20X2 20X2 By Interest on DRR
A/c [(Interest on
10% stock
(` 6,50,000 x 10%)] 65,000
7,85,000 7,85,000

© The Institute of Chartered Accountants of India


REDEMPTION OF DEBENTURES 8.25

3. 10% Secured Bonds of Govt. (DRR Investment) A/c


` `
1st To Balance b/d 6,00,000 31st March, By Bank A/c 5,85,000
April, 20X2 (6,50,000 x 90%) =
20X1 5,85,000)
By DDR A/c 15,000
6,00,000 6,00,000

4. Bank A/c
` `
31st To Balance b/d 3,00,000 31st March, By 12% Debenture 8,25,000
March, To Interest 65,000 20X2
20X2 (6,50,000 x 10%)
To DRR Investment A/c 5,85,000 By Balance c/d 1,25,000
9,50,000 9,50,000

5. Debenture holders A/c


` `
31st To Bank A/c 8,25,000 31st March, By 12% Debentures 7,50,000
March, 20X2 By Premium on
20X2 redemption of
debentures @ 10% 75,000
8,25,000 8,25,000

ILLUSTRATION 7
The Summary Balance Sheet of BEE Co. Ltd. on 31st March, 20X1 read as under :
Liabilities ` Assets `
Share Capital : Freehold property 1,15,000
Authorised: Stock 1,35,000
30,000 Equity Shares of ` 10 each 3,00,000 Trade receivables 75,000
Issued and Subscribed: Cash 30,000
20,000 Equity Shares of ` 10 each Balance at Bank 2,00,000
fully paid 2,00,000
Profit and Loss Account 1,20,000
12% Debentures 1,20,000
Trade payables 1,15,000

5,55,500 5,55,000

At the Annual General Meeting it was resolved :


(a) To give existing shareholders the option to purchase one ` 10 share at ` 15 for
every four shares (held prior to the bonus distribution), this option being taken up
by all shareholders.
(b) To issue one bonus share for every four shares held.

© The Institute of Chartered Accountants of India


8.26 ACCOUNTING

(c) To repay the debentures at a premium of 3%.


Give the necessary journal entries and the company’s Balance Sheet after these
transactions are completed.
Solution
Journal of BEE Co. Ltd.
Dr. Cr.
` `
Bank A/c Dr. 75,000
To Equity Shareholders A/c 75,000
(Application money received on 5,000 shares @ ` 15
per share to be issued as rights shares in the ratio of
1:4)
Equity Shareholders A/c Dr. 75,000
To Equity Share Capital A/c 50,000
To Securities Premium A/c 25,000
(Share application money on 5,000 shares @ ` 10 per
share transferred to Share Capital Account, and ` 5
per share to Securities Premium Account vide Board’s
Resolution dated….)
Securities Premium A/c Dr. 25,000
Profit & Loss A/c Dr. 25,000
To Bonus to Shareholders A/c 50,000
(Amount transferred for issue of bonus shares to
existing shareholders in the ratio of 1:4 vide General
Body’s resolution dated...) (refer note below)
Bonus to Shareholders A/c Dr. 50,000
To Equity Share Capital A/c 50,000
(Issue of bonus shares in the ratio of 1 for 4 vide
Board’s resolution dated....)
12% Debentures A/c Dr. 1,20,000
Premium Payable on Redemption A/c @ 3% Dr. 3,600
To Debenture holders A/c 1,23,600
(Amount payable to debentures holders)
Profit & Loss A/c Dr. 3,600
To Premium Payable on Redemption A/c 3,600
(Premium payable on redemption charged to Profit &
Loss A/c)
© The Institute of Chartered Accountants of India
REDEMPTION OF DEBENTURES 8.27

Debenture holders A/c Dr. 1,23,600


To Bank A/c 1,23,600
(Amount paid to debenture holders on redemption)

Note :
The number of bonus shares issued has been calculated on the basis of issued capital
before rights issued i.e., 20,000 shares (and not 25,000 shares after rights issue).
Balance Sheet of BEE Co. Ltd. as on...... (after completion of transactions)
Particulars Note No `
I. Equity and liabilities
(1) Shareholder's Funds
(a) Share Capital 1 3,00,000
(b) Reserves and Surplus 2 91,400
(2) Current Liabilities
(a) Trade payables 1,15,000
Total 5,06,400
II. Assets
(1) Non-current assets
(a) Fixed assets
(i) Tangible Assets 3 1,15,000
(2) Current assets
(a) Inventories 1,35,000
(b) Trade receivables 75,000
(c) Cash and bank balances 4 1,81,400
Total 5,06,400
Notes to Accounts
`
1. Share Capital
30,000 shares of ` 10 each fully paid
(5,000 shares of ` 10 each, fully paid issued as bonus 3,00,000
shares out of securities premium and P&L Account)
2. Reserve and Surplus
Profit & Loss Account (1,20,000 – 3,600) 1,16,400
Less: Utilisation for issue of bonus shares (25,000) 91,400

© The Institute of Chartered Accountants of India


8.28 ACCOUNTING

3. Tangible assets
Freehold Property 1,15,000
4. Cash and bank balances
Cash at Bank (2,00,000 + 75,000 – 1,23,600) 1,51,400
Cash in Hand 30,000 1,81,400

ILLUSTRATION 8
The summarised Balance Sheet of Convertible Limited, as on 30th June, 20X1, stood as
follows:
Liabilities `
Share Capital : 5,00,000 equity shares of ` 10 each fully paid 50,00,000
General Reserve 75,00,000
Debenture Redemption Reserve 50,00,000
13.5% Convertible Debentures, 1,00,000 Debentures of ` 100 each 1,00,00,000
Other loans 50,00,000
Current Liabilities and Provisions 1,25,00,000
4,50,00,000
Assets :
Fixed Assets (at cost less depreciation) 1,60,00,000
Debenture Redemption Reserve Investments 40,00,000
Cash and bank Balances 50,00,000
Other Current Assets 2,00,00,000
4,50,00,000
The debentures are due for redemption on 1st July, 20X1. The terms of issue of debentures
provided that they were redeemable at a premium 5% and also conferred option to the
debenture holders to convert 20% of their holding into equity shares at a predetermined
price of ` 15.75 per share and the payment in cash.
Assuming that :
(i) except for 100 debenture holders holding totally 25,000 debentures, the rest of
them exercised the option for maximum conversion.
(ii) the investments realise ` 44 lakhs on sale; and
(iii) all the transactions are put through, without any lag, on 1st July, 20X1.
Redraft the balance sheet of the company as on 1st July, 20X1 after giving effect to the
redemption. Show your calculations in respect of the number of equity shares to be
allotted and the cash payment necessary.

© The Institute of Chartered Accountants of India


REDEMPTION OF DEBENTURES 8.29

Solution
Convertible Limited
Balance Sheet as on July 1, 20X1

Particulars Note No Figures as at the


end of current
reporting period
`
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 60,00,000
(b) Reserves and Surplus 2 1,29,75,000
(2) Non-Current Liabilities
(a) Long-term borrowings - Unsecured Loans 50,00,000
(3) Current Liabilities
(a) Short-term provisions 1,25,00,000
Total 3,64,75,000
II. Assets
(1) Non-current assets
(a) Fixed assets
(i) Tangible assets 1,60,00,000
(2) Current assets
(a) Cash and bank balances 4,75,000
(b) Other current assets 2,00,00,000
Total 3,64,75,000

Notes to Accounts

`
1. Share Capital
6,00,000 Equity Shares (5,00,000 + 1,00,000)
of ` 10 each 60,00,000
2. Reserves and Surplus
General Reserve 75,00,000
Add : Debenture Redemption Reserve transfer 50,00,000
1,25,00,000
Add: Profit on sale of investments
(44,00,000 – 40,00,000) 4,00,000
© The Institute of Chartered Accountants of India
8.30 ACCOUNTING

1,29,00,000
Less : Premium on redemption of debentures (5,00,000) 1,24,00,000
Securities Premium Account (1,00,000 x 5.75) 5,75,000
1,29,75,000

Working Notes
(i) Calculation of number of shares to be allotted :
Total number of debentures 1,00,000
Less : Number of debentures not opting for conversion (25,000)
75,000
20% of 75,000 15,000
Redemption value of 15,000 debentures (15,000 x 105) ` 15,75,000
Number of Equity Shares to be allotted :

= = 1,00,000 shares of ` 10 each.


(ii) Calculation of cash to be paid : `
Number of debentures 1,00,000
Less : number of debentures to be converted into equity shares (15,000)
85,000
Redemption value of 85,000 debentures (85,000 × ` 105) ` 89,25,000
(iii) Cash and Bank Balance :
Balance before redemption 50,00,000
Add : Proceeds of investments sold 44,00,000
94,00,000
Less : Cash paid to debenture holders (89,25,000)
4,75,000
Note: The premium on redemption of debentures can also be adjusted against
Securities Premium Account.

© The Institute of Chartered Accountants of India


REDEMPTION OF DEBENTURES 8.31

SUMMARY

 Debenture creates a charge against some or all the assets of the company.
 Charge may be fixed or floating, depends upon the condition of issue.
 Debentures may be redeemed after a fixed number of years or after a certain
period has elapsed.
 For redemption of Debentures a company should maintain Debenture Redemption
Reserve
 Methods of Redemption: Lumpsum payment; in instalments and purchase of
debentures in open market.

TEST YOUR KNOWLEDGE


MCQs
1. Which of the following statements is true?
(a) A debenture holder is an owner of the company
(b) A debenture holder can get his money back only on the liquidation of the
company
(c) A debenture issued at a discount can be redeemed at a premium
2. Which of the following statements is false?
(a) Debentures can be redeemed by payment in lump sum at the end of a
specified period.
(b) Debentures cannot be redeemed during the life time of the company.
(c) Debentures can be redeemed by payments in annual installments.
3. For debentures issued by other companies including manufacturing and
infrastructure companies, debentures redemption reserve will be considered
adequate if
(a) 20% of the value of debentures issued through public issue.
(b) 25% of the value of debentures issued through public issue.
(c) 30% of the value of debentures issued through public issue.

© The Institute of Chartered Accountants of India


8.32 ACCOUNTING

Theoretical Questions
Q1. What is meant by redemption of debentures?
Q2. Write short note on Debenture Redemption Reserve.
Practical Questions
Question 1
A Company had issued 20,000, 13% Convertible debentures of ` 100 each on 1st
April, 20X1. The debentures are due for redemption on 1st July, 20X2. The terms of
issue of debentures provided that they were redeemable at a premium of 5% and also
conferred option to the debenture holders to convert 20% of their holding into equity
shares (Nominal value ` 10) at a price of ` 15 per share. Debenture holders holding
2,500 debentures did not exercise the option. Calculate the number of equity shares to
be allotted to the Debenture holders exercising the option to the maximum.
Question 2
Libra Limited recently made a public issue in respect of which the following information
is available:
(a) No. of partly convertible debentures issued- 2,00,000; face value and issue price
` 100 per debenture.
(b) Convertible portion per debenture- 60%, date of conversion- on expiry of 6
months from the date of closing of issue.
(c) Date of closure of subscription lists- 1.5.20X1, date of allotment- 1.6.20X1, rate of
interest on debenture- 15% payable from the date of allotment, value of equity
share for the purpose of conversion- ` 60 (Face Value ` 10).
(d) Underwriting Commission- 2%.
(e) No. of debentures applied for- 1,50,000.
(f) Interest payable on debentures half-yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the
year ended 31st March, 20X2 (including cash and bank entries).
Question 3
On 1st April, 20X1, in MK Ltd.’s ledger 9% debentures appeared with a opening balance
of ` 50,00,000 divided into 50,000 fully paid debentures of ` 100 each issued at par.
Interest on debentures was paid half-yearly on 30th of September and 31st March
every year.

© The Institute of Chartered Accountants of India


REDEMPTION OF DEBENTURES 8.33

On 31.5.20X1, the company purchased 8,000 debentures of its own @ ` 98 (ex-interest)


per debenture.
On 31.12.20X1 it cancelled 5,000 debentures out of 8,000 debentures acquired on
31.5.20X1.
On 31.1.20X2 it resold 2,000 of its own debentures in the market @ ` 101 (ex-interest)
per debenture.
You are required to prepare:
(i) Own debentures account;
(ii) Interest on debentures account; and
(iii) Interest on own debentures account.
Question 4
A company had 16,000, 12% debentures of ` 100 each outstanding as on 1st April,
20X1, redeemable on 31st March, 20X2. On that day DRR was ` 14,98,000 represented
by 2,000 own debentures purchased at the average price of ` 99 and 9% stocks face
value of ` 13,20,000. The annual instalment was ` 56,800.
On 31st March, 20X2 the investments were realised at ` 98 and the debentures were
redeemed. You are required to write up the following accounts for the year ending 31st
March 20X2:
(1) 12% Debentures account
(2) Debenture redemption reserve account.

ANSWERS/ HINTS
MCQs
1. (c) 2. (b) 3. (b)
Theoretical Questions
1. Debentures are usually redeemable, but a company may also issue irredeemable
debentures. Redeemable debentures may be redeemed after a fixed number of
years or after a certain number of years has elapsed since their issue or on giving
a specified notice, or by annual drawing.

© The Institute of Chartered Accountants of India


8.34 ACCOUNTING

2. A company issuing debentures is required to create a debenture redemption


reserve account out of the profits available for distribution of dividend and
amounts credited to such account cannot be utilised by the company except for
redemption of debentures. Such an arrangement would ensure that the company
will have sufficient liquid funds for the redemption of debentures at the time they
should fall due for payment. For details, refer para 3.
Practical Questions
Answer 1
Calculation of number of equity shares to be allotted
Number of
debentures
Total number of debentures 20,000
Less: Debenture holders not opted for conversion (2,500)
Debenture holders opted for conversion 17,500
Option for conversion 20%
Number of debentures to be converted (20% of 17,500) 3,500
Redemption value of 3,500 debentures at a premium of 5%
[3,500 x (100+5)] ` 3,67,500
Equity shares of ` 10 each issued on conversion [` 3,67,500/ ` 15 ] 24,500 shares
Answer 2
Journal Entries in the books of Libra Ltd.
Date Particulars Amount Dr. Amount Cr.
` `
1.5.20X1 Bank A/c Dr. 1,50,00,000
To Debenture Application A/c 1,50,00,000
(Application money received on
1,50,000 debentures @ ` 100 each)
1.6.20X1 Debenture Application A/c Dr. 1,50,00,000
Underwriters A/c Dr. 50,00,000
To 15% Debentures A/c 2,00,00,000
(Allotment of 1,50,000 debentures
to applicants and 50,000
debentures to underwriters)
Underwriting Commission Dr. 4,00,000
To Underwriters A/c 4,00,000

© The Institute of Chartered Accountants of India


REDEMPTION OF DEBENTURES 8.35

(Commission payable to
underwriters @ 2% on ` 2,00,00,000)
Bank A/c Dr. 46,00,000
To Underwriters A/c 46,00,000
(Amount received from underwriters
in settlement of account)
30.9.20X1 Debenture Interest A/c Dr. 10,00,000
To Bank A/c 10,00,000
(Interest paid on debentures for 4
months @ 15% on ` 2,00,00,000)
30.10.20X1 15% Debentures A/c Dr. 1,20,00,000
To Equity Share Capital A/c 20,00,000
To Securities Premium A/c 1,00,00,0000
(Conversion of 60% of debentures into
shares of ` 60 each with a face value
of ` 10)
31.3.20X2 Debenture Interest A/c Dr. 7,50,000
To Bank A/c 7,50,000
(Interest paid on debentures for the
half year) (refer working note below)

Working Notes
1. Calculation of Debenture Interest for the half year ended 31st March, 20X2
On ` 80,00,000 for 6 months @ 15% = ` 6,00,000
On ` 1,20,00,000 for 1 months @ 15% = ` 1,50,000
` 7,50,000

© The Institute of Chartered Accountants of India


8.36 ACCOUNTING

Answer 3
MK Ltd.’s Ledger
(i) Own Debentures Account
` `
31.5.X1 To Bank 7,84,000 31.12.X1 By 9% Debentures A/c 5,00,000
(5,000 x 100)
31.12.X1 To Capital Reserve (Profit 10,000 31.1.X2 By Bank- Resale of 2,000 2,02,000
on cancellation) debentures
(refer working note) (2,000 x 101)
31.1.X2 To Profit and Loss A/c 6,000 31.3.X2 By Balance c/d 98,000
(Profit on resale) (refer
working note)
8,00,000 8,00,000

(ii) Interest on Debentures Account


` `
31.5.X1 To Bank (Interest for 2 months 12,000 31.3.X2 By Profit and Loss A/c (b.f.) 4,38,750
on 8,000 debentures)
30.9.X1 To Interest on own debentures 24,000
(Interest for 4 months on
8,000 debentures)
30.9.X1 To Bank (Interest for 6 months 1,89,000
on 42,000 debentures)
31.12.X1 To Interest on own debentures 11,250
(Interest for 3 months on
5,000 debentures)
31.3.X2 To Interest on own debentures 4,500
(Interest for 6 months on
1,000 debentures)
31.3.X2 To Bank (Interest for 6 months 1,98,000
on 44,000* debentures)
4,38,750 4,38,750

*50,000 – 5,000 – 1,000

(iii) Interest on Own Debentures Account


` `
31.3.X2 To Profit and Loss A/c (b.f.) 45,750 30.9.X1 By Interest on Debentures A/c 24,000
31.12.X1 By Interest on Debentures A/c 11,250
31.01. X2 By Bank (interest for 4 months 6,000
on 2,000 debentures)
31.03. X2 By Interest on Debentures 4,500

45,750 45,750

© The Institute of Chartered Accountants of India


REDEMPTION OF DEBENTURES 8.37

Working Notes
31.5. X1 Acquired 8,000 Debentures @ 98 per debenture (ex-interest) `
Purchase price of debenture (8,000 × ` 98) = 7,84,000
Interest for 2 months [` 8,00,000 × 9% × 2/12] = 12,000
30.9. X1 Interest on own debentures
[` 8,00,000 × 9% × ½ ] less `12,000 = 24,000
Interest on other debentures ` 42,00,000 × 9% × ½ = 1,89,000
31.12.X1 Cancellation of 5,000 own debentures
Face value ` 100 less acquired at ` 98 = 2 × 5,000 = 10,000
31.1. X2 Resale of 2,000 Debentures sold for 101 (ex-interest) acquired
for ` 98 (ex-interest)
2,000 × ` 3 per debenture = 6,000
31.12. X1 Interest on cancelled 5,000 debentures
1 11,250
5,000 × ` 100 × 9% × =
4
31.3. X2 Interest on 1,000 own debentures
` 1,00,000 × 9% × ½ = 4,500

Answer 4
12% Debentures Account
Date Particulars ` Date Particulars `
31st March, To Own debentures A/c 2,00,000 1st April, By Balance b/d 16,00,000
20 X2 20 X1
To Bank A/c 14,00,000
16,00,000 16,00,000

Debenture Redemption reserve Account


Date Particulars ` Date Particulars `
31st March, To 9% Stock A/c (loss) 1st April, By Balance b/d 14,98,000
20 X2 (W.N.5) 6,400 20 X1
To General reserve
A/c (Bal.fig.) 16,93,200 31st March, By Profit and loss A/c 56,800
20 X2
By Interest on DRR A/c 1,42,800
(W.N.3)

© The Institute of Chartered Accountants of India


8.38 ACCOUNTING

By Own debentures A/c 2,000


(W.N.4)
16,99,600 16,99,600

Working Notes
1. Amount of stock as on 1st April, 20X1
`
DRR balance as on 1st April, 20X1 14,98,000
Less: Own debentures (2,000 x 99) (1,98,000)
13,00,000
2. Sales value of 9% stock= Face value / ` per stock
= ` 13,20,000 / ` 100 = 13,200 stock
Sales value = ` 13,200 stock x ` 98 per stock
= ` 12,93,600
3. Interest credited to DRR Fund
(i) Interest on 9% stock (` 13,20,000 x 9%) ` 1,18,800
(ii) Interest on own debentures (2,000 Debentures x ` 100 x 12%) ` 24,000
` 1,42,800
4. Own Debentures Account
` `
1st April, To Balance b/d 1,98,000 31st March, By 12% Debenture 2,00,000
20X1 20X2 A/c
31st March, To DRR A/c 2,000
20X2
2,00,000 2,00,000

5. 9% Stock Account
` `
1st April, To Balance b/d 31st March, By Bank account
20X1 (Face value `13,20,000) 20X2 (W.N.2) 12,93,600
(W.N.1) 13,00,000
By DRR
(loss on sales) 6,400
13,00,000 13,00,000

© The Institute of Chartered Accountants of India